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Dividend

Also known as: Company Dividend, Share Dividend

Definition

A dividend is a payment of company profits distributed to shareholders, typically paid regularly as a reward for holding shares in that company.

Understanding how dividends work is essential for estate planning, particularly if you own company shares or investment portfolios that generate dividend income—these rights transfer with the shares in your will.

What Does Dividend Mean?

Under UK company law, dividends are payments from a company's distributable profits to its shareholders. The Companies Act 2006 Part 23 governs when companies can legally distribute profits, requiring that dividends can only be paid from available profits after tax. There's no statutory definition of "dividend" itself, but case law established in Memec v CIR (1998) defines it as "a payment out of profits in respect of a share in a company." Companies typically pay two types: interim dividends during the financial year and final dividends after year-end accounts are approved.

Directors decide when to pay dividends based on company profitability and cash flow. Payments must be proportionate to share ownership unless different share classes exist. For tax purposes, dividends are treated differently from salary—individuals receive a £500 dividend allowance in the 2024/25 tax year, with dividend income above this taxed at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. Many company directors use dividends as a tax-efficient way to extract profits since they're not subject to National Insurance contributions. For example, James owns all shares in his limited company. After paying Corporation Tax, the company has £50,000 profit available. James declares a dividend, paying himself £50,000 without incurring National Insurance charges.

For estate planning, dividends have important implications. Shares held in an estate continue generating dividend income during the administration period, and this income belongs to the estate—not directly to beneficiaries. The estate pays income tax on dividends at 8.75% with no dividend allowance, and personal representatives must declare this income on a Trusts and Estates tax return if estate income exceeds £500. When shares eventually transfer to beneficiaries, all future dividends belong to them. Crucially, you cannot leave dividend income to one person and shares to another in your will—dividend rights are inseparable from share ownership. For inheritance tax purposes, shares are valued at their market value on the date of death, not based on future dividend potential, though shares in qualifying trading companies may be eligible for Business Property Relief, potentially reducing inheritance tax by up to 100%.

Common Questions

"Do dividends still get paid after someone dies?" Yes, dividends continue to be paid on shares held in the deceased's estate during the administration period. These dividends become part of the estate and are subject to income tax at 8.75%, with no dividend allowance available to the estate. The personal representatives must declare this income.

"How are dividends treated in a will?" When you leave company shares in your will, any dividends paid on those shares after your death belong to the estate until the shares are transferred to beneficiaries. Once transferred, future dividends go directly to the new shareholder. You cannot separately gift dividends—they follow ownership of the shares.

"Are dividends subject to inheritance tax?" Dividends received before death are part of your estate and included in the inheritance tax calculation if your estate exceeds £325,000. The shares themselves (which generate dividends) are valued at market value on the date of death for inheritance tax purposes, regardless of future dividend payments.

Common Misconceptions

Myth: "I can leave dividend income to one person and the shares to another in my will"

Reality: Dividends cannot be separated from share ownership. When you gift shares in your will, you're automatically gifting the right to receive future dividends from those shares. Any dividends paid between your death and the share transfer belong to the estate, not to a specific beneficiary. You cannot split ownership of an asset from the income it generates.

Myth: "Dividends are guaranteed payments, so shares with high dividends are always valuable"

Reality: Companies have no legal obligation to pay dividends and can cancel, reduce, or suspend them at any time, even if they made profits. A company's dividend history doesn't guarantee future payments. For inheritance tax purposes, shares are valued at their market value on the date of death, not based on expected future dividends.

  • Company Shares: Dividends are the income payments generated by owning company shares in a limited company.
  • Shareholder: Only registered shareholders are entitled to receive dividend payments declared by the company.
  • Limited Company: The business entity that declares and pays dividends to its shareholders from distributable profits.
  • Investment Portfolio: Dividend-paying shares form a common component of investment portfolios, generating regular income for investors.
  • Estate Income: Dividends paid on shares during estate administration are a type of estate income subject to specific tax rules.

Need Help with Your Will?

If you own company shares that generate dividends, planning how those shares and their future dividend income pass to beneficiaries is an important part of your will. Understanding that dividend rights cannot be separated from share ownership helps you make clear decisions about who inherits your business assets.

Create your will with confidence using WUHLD's guided platform. For just £99.99, you'll get your complete, legally binding will plus three expert guides. Preview your will free before paying anything—no credit card required.

Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.